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Favorable economy could push auto sales higher

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DETROIT—Sales will keep growing in 2015 on favorable economic conditions and are expected to be around 17 million or more, according to two industry forecasts.

That's the position of analysts at Cox Automotive, particularly its Kelley Blue Book unit, and an analyst at Bank of America Merrill Lynch.

Speaking prior to the North American International Auto Show in Detroit, analysts for Kelley Blue Book forecast 2015 U.S. light-vehicle sales of 16.9 million light vehicles, about 2 percent higher than 2014's 16.5 million.

That would be the smallest annual unit increase during the recovery that started in 2010. U.S. sales rose 6.1 million units between 2009-14.

John Murphy, lead U.S. auto analyst in equity research with Bank of America Merrill Lynch, predicts the auto industry will sell more than 17 million vehicles in 2015 and could reach 20 million in 2018, but he expects a sharp downturn after that.

He made his presentation during the Automotive News World Congress on Jan. 14.

“We expect the cycle to continue for the next two years, reaching a peak in 2018 at 20 million units,” he said. “That's a lot higher than most people are expecting, but we also believe there will be a very significant downturn after that.”

For now, he said, “We're in a good recovery.”

In 2014, U.S. sales grew 6 percent to 16.5 million vehicles. It was the fifth straight year U.S. deliveries grew after hitting a 27-year low of 10.4 million in 2009 during the Great Recession.

Murphy said his new vehicle sales forecast for 2015 is 17.3 million and gave several reasons to support his prediction.

He said dealers' new vehicle stock is normal, and the population of vehicles on the road that are 11 years old and older has increased by almost 28 percent over the last eight years.

“And when you think about obsolescence beginning to occur and technology and fuel economy improvements, those older cars are more likely to get scrapped,” he said.

Murphy said those factors all lead to strong vehicle pricing for new and used vehicles, which will reduce the need for aggressive incentives or price cutting.

He said replacement demand has propelled the industry's recovery so far. But improving consumer confidence and an increase in the number of miles driven, after several years when that measure held steady, are creating more discretionary demand for vehicles.

But Murphy cautioned that the good times won't last forever and that auto makers need to hold the lines on their balance sheets.

He added this is not time to “blow” capital investing in “willy-nilly projects.”

Kelley Blue Book projections

The KBB 2015 outlook isn't that different from forecasts by others. Cars.com expects 17.0 million and Toyota Motor Sales U.S.A.'s admittedly conservative forecast is 16.7 million.

The interesting part is how KBB expects the year ahead to play out: solid retail volume, rising incentives and higher net prices.

Leasing's share of new vehicle transactions will grow more slowly this year than in the past few years, predicted Alec Gutierrez, senior market analyst at Kelley Blue Book.

KBB expects that the number of new vehicles leased will rise to 3.51 million in 2015 from 3.36 million in 2014.

As a percentage of retail sales, though, that equates to a gain of 25.3 percent this year from 24.9 percent in 2014 and 23.4 percent in 2013, according to KBB data.

Leasing penetration growth is moderating as higher levels of returning off-lease vehicles reduce used-car values, said Eric Ibara, KBB director of residual value.

“Auto makers tend to back off leasing either when used car prices drop or their costs escalate,” he said. “I think there's opportunity for either or both of those to happen over the coming year.”

He added: “Leasing is already an expensive way to market vehicles.”

On the other hand, Gutierrez said, leasing “could press up beyond 25 to 26 percent” industrywide this year, after averaging “closer to 27 to 28 percent” at the tail end of 2014. December is typically a lease-heavy month because of the strength of the luxury segment that month.

Retail sales again will carry the ball in 2015: rising to 13.9 million from 13.5 million last year, he said. By implication, 2015 fleet sales will be flat, roughly at about 3 million units.

Average incentives will jump $159 to $2,950 per vehicle, Gutierrez said. That's the highest dollar amount on record, but net auto prices are rising, too.

As a percentage of average transaction prices, KBB expects 2015 incentives to be 8.8 percent. That's above the lowest level of 8.0 percent recorded in 2012 and 2013 but also below the highest level of 9.7 percent, seen in 2005 and 2008.

Auto makers still can maintain pricing discipline at that level, Gutierrez said. “It's not at a level where we think there is a risk.”

That's because the industry's average transaction price—what consumers pay after taking incentives—keeps rising.

KBB expects transaction prices to average $33,500 in 2015, up almost $700 from 2014's $32,804.